The Divide, Short Predictions and an Answer to The Inflation Question

The divide is here. There is no real solution from a macro perspective since we’re not politicians and we don’t have much of a say on anything. One of the themes here is that you should focus on the “microeconomics” since big changes are unlikely to happen (waiting and hoping is not a sound strategy). While we recommend always taking the time to vote in favor of things you agree with, the reality is that the masses are going to decide the direction in the end. Instead of praying for a particular government official, boss or company to come save you… It’s time to save yourself. 

What is Happening: The divide between the people doing well and doing poorly is now on full display. We have no idea how this will be solved any time soon. What we do know is that the vast majority are going to suffer.

Unless you work in an industry that is knowledge based, internet based or software based… You’re in a lot of trouble. We cannot imagine having any business that is brick and mortar with no real revenue online. Nothing but carrying cost and expenses. 

Thinking through this more, it is clear the the financial divide will widen even *within* industries like real estate and brick and mortar for a simple reason… survival rates. Take two examples: 1) a rent controlled building and 2) a restaurant that survives a massive 6-12 month drawdown. Realistically, the only people who can survive are the people with a lot of money.

If a person was running a building that had forced rent control, he’s actually happy that people are leaving since they were going to stick around forever (money losing tenants). The restaurant on the other hand was already successful because it was able to survive 6 months of limited to no revenue. 

While the obvious winners are there (internet, software, etc.) as people work from home, the less obvious one = the classic rich. The classic rich (through real estate or small businesses) will become extremely well off only if they were generating large margins. This is something that many people forget. You can run a small business of say 10 pizza shops, but if you were collecting 20-30% operating margins, your cash position is enormous and you survive… Only to take over the prime locations of your competitors. You’re going to get bigger and better. 

In a phrase: consolidation of power. If you were one of the “winners” in your arena, you just got bigger and better due to this pandemic. You didn’t change your marketing, you didn’t compete, you simply won through attrition. 

Thrive Through Twenty Five: This is our new mantra. Every industry is going through consolidation as inventory risk is high. Maintain every single relationship you have, put on those $5 t-shirts… $25 jeans and continue working. Why? Even if you’re flat you’re getting *way* ahead. The reality is that attrition is going to accelerate across the board in every single industry. Do what you can to stay as close to flat as possible (up is of course better). 

Do not take your foot off the gas. When you see banks trying to encourage personal loans, credit cards, refinancing etc at rapid rates… you know things are starting to get bad. This means your competitors are dying off.

Within your industry (if you’re in a career), you’ll see more cuts around Q3/Q4. So you just need to survive. Do not complain about being flat as you’re actually gaining ground against everyone on a relative basis. From now until 2025, you need to push as hard as you can as economic downturns create the most wealth dispersion. If you’re in a career, do not complain about pay unless you have a job offer in your hand. Period. Having zero income is not a wise decision in the current economy. 

Micro Personal Choices: With the main concepts out of the way, it’s time to focus on the most important person *you*. That’s the reality. If you want to help your family, friends etc. You need to be in a position to do so. Using all of your time to produce is the fastest way to provide. Using your time to provide limits your abilities as you have no scale. If you can produce at or above what you were doing last year, you can leverage your earnings (therefore trading money for time, most people attempt to do the reverse). 

Avoid Flash: This is an extreme situation. Unless you’re in a private setting you do not want to flash money. You will be targeted (burglary, robbery, etc.). This seems obvious but we’d even avoid wearing custom/high quality suits. There is no reason for it as meetings are now virtual. You can wear them for the zoom meetings but don’t be foolish. You don’t want to wear it in public. If you’re looking for deals on flashy products (watches, high-end cars etc.) this is the time to shop. That said, we’d strongly recommend items that hold value. IE. better to get a deal on a Rolex vs. a 2020 Porsche. Why? Well, this economic unrest is not going to go away any time soon. Our posts on the virus (received laughs) and yet it is playing out as expected as we enter a second wave (a bit earlier than expected but that’s noise as predicting exact months is next to impossible). 

Limit Contact Points: People are “over it”. This is the common phrase you’ll hear. They are okay with getting sick and infecting other people at this point. The good news? If your friends are intelligent they won’t yell at you for staying at home. Keep your contact points at or near zero as you don’t want to infect anyone else. Save the first world problems for a different year. Men and Women have lost their kids in wars. Men and Women have suffered heart attacks. Men and women have battled with cancer. We’re pretty sure everyone reading this can avoid bars/clubs and massive group settings for six months. 

Add Individual Items: If you are bored in this environment you’re probably just a boring person to begin with. You still have a lot of options… so here we go: 1) new instrument, 2) isolated sports like golf, 3) gardening/home repair items, 4) purchase a pet dog and 5) outdoor hiking in less popular areas to avoid crowds. For fun if you want a recommendation and you are 25-35 we will go with golf. Is it fast paced? No. Will it cause you to meet other rich people? Yes.

If you were looking to learn a skill that you can leverage in the future, becoming a decent golfer will help. Lots of people never learn and this is a great excuse. Take all your fun/travel/partying expense and learn to enjoy a sport like golf that will stay with you until you’re in your 70s. If you really cannot stand the game, go ahead and look at the other items we mentioned.

Add Cooking: This has been an interesting one. Practically everyone is learning to cook their own food so you may as well follow the masses on this one. You don’t need to go against the crowd in everything. Learning to cook is healthy and it’s a skill that will also stay with you for 30-40 years. As a note, the more expensive items are actually on sale and the cheaper items are actually going up in price. That is how bad the economy is doing. Many families cannot afford expensive items like scallops and lobster, so you’re seeing lower prices on high-end steak cuts and seafood. The price of pork and chicken appear to be going up (general comment). 

Revisit Security: Yes we are serious. We’re not going to get into a battle over home security systems, guns etc. All of these topics are far too emotional. That said, the world is getting pretty chaotic so it would be wise to research a wide range of security features. We talked about safes/vaults in the past but we continued to go down the rabbit hole and are looking at every single security item from cameras to wall types (for homes) and more. You just don’t want to leave a single stone unturned. This is one of the best times to get the research done. 

Learn a Trade: For those with no income, we’d strongly recommend learning a trade that can earn a livable wage over the next 5-10 years. Our blog has grown quite a bit which creates a wider range of income distribution (previously only focused on high earning individuals with $250K+ as we focused on the big three money making careers). So. For those that are simply trying to get started, we would go into any trade (medical – you can learn to draw blood for testing; standard trades – plumber, auto mechanic; any heavy equipment installation – generators, HVAC systems etc.). If you can learn any of these basic items you’ll buy your self at least 5-10 years as they are difficult to automate with a robot near-term (again, this is a temporary solution and something you can easily learn in a short period of time). 

Ads are Back: If you had trouble making money in the 12 year bull market and are struggling to make money in a recession as well… the reality is that you probably haven’t tried hard enough to succeed. This is not something people want to admit as they never take responsibility for their own actions. So…

The time to figure out the ad game is now. Why? This is a rare opportunity where big players have paused/cancelled their ad spending. What does this mean? With major companies cutting their budgets for “political reasons” or “social reasons”, the cost of ads has gone down (cost of bids is now artificially low). This is *THE* opportunity to figure it out. If you were close in 2019, you should be able to make it work right now (as we speak). Not sure if we can be clearer than that. You’re unlikely going to get another opportunity like this where spending is down among major players… opening up lower bids for at least a quarter (ability to test every single ad idea you have). 

A Macro Question – Inflation

On a separate note we noticed that a lot of people don’t understand this topic: inflation. When people talk about inflation and the declining value of the dollar, at this time they are referring to *money printing*. So we need to be clear here. Most people think of inflation as “price of products going up”. However, this shouldn’t be confused with *inflation of the money supply*. 

Keeping it in simple terms. Lets say there is $1T USD floating around (no this isn’t even close, Google search M0 money supply, we’re making an example so it is easy to understand). If you have $1T in physical cash floating around and suddenly print another $1T and spread this around evenly, you’ve now caused the money supply to double. This would be *inflation of the money supply*. Even if people do not buy goods (they sit at home on the money), the number of dollars floating around has factually doubled.

This should explain the issue clearly. Right now the government has to “guess” and fill the void of lost demand by printing money (at least that is their strategy). Since people cannot spend their money right now, it’s difficult (if not impossible) to guess the exact amount of money needed to keep the dollar value flat. If they print too much and the economy opens up in full force, you might have massive price inflation of goods. Why? Well, if your net worth doubled you’re willing to spend more than $100 for those Nike shoes and more than $100 for your favorite dinner spot. 

Hopefully this clears it up, monetary inflation, price deflation and price inflation are three different items. So we can move onto the next step.

What Does the USA Want? In an ideal situation they do not want deflation and would prefer to have *slight* inflation. Slight inflation is “okay” since we are a debt burdened country. Think about it like this. If your average citizen owns a $100K house ($20K downpayment, $80K debt) and makes $50K per year… If his income goes down to $40K and the price of the home declines to $80K, he’s in big trouble. Why? Well he still *owes* $80K in debt (assumes 80% was purchased with debt) and the asset is only worth $80K. Meanwhile his income also got cut by 20% so he can’t make payments. Not good. Leads to tons of defaults and a cascading disaster. 

What does this mean for you? It means the government is going to try and veer on the side of inflation. This is all you (the reader) needs to understand at this point. If they are going to veer on the side of inflation it means they will more likely *over print* versus under print. If they over print a bit and the example above sees his income go to $55K and his property go to $110K, he’s in a lot better shape compared to the $80K home and $40K income. While they are simply numbers on a screen, the debt part is significant as he has the option to sell his home at $110K (making a small profit). This is a *huge* deal as it allows him to downsize if his wife loses her job or he has sudden expenses to take care of. IE. optionality is there. 

Fast Forward to Now: Now that the utopian answer is here: exact printing given to individuals who need it… we need to shift gears and focus on reality. The reality is that businesses are blowing up left and right and the money is not exactly going into the correct hands. Having the government buy bonds of individual companies (many of whom don’t need government help) is not going to flow to the middle class. The only thing that helped a bit was a $1,200 check to the middle class. 

Since the money will not go out effectively we’re looking at a dispersion of wealth (outlined above already in this post).

In summary, since we enjoy flow charts. this is what we should expect to see: 1) people sell assets to pay bills, 2) price of assets goes down, 3) value of dollar goes up since there is high demand for it, 4) government prints money to try and prop up asset prices since those assets are being sold for cash, 5) this happens yet again as people are forced to sell, 6) government print more to offset the selling pressure… repeat repeat repeat. So the “money printer go brrrr” meme is alive and well. 

This is why we’ve continued to say the same thing: just buy gold, crypto and hold enough cash (different number for everyone). Why? Well the one thing in common is the *number of dollars being printed keeps going up*. Again. They will print to offset people selling assets for cash to pay bills. The common denominator is printing which means you want to own items with limited supply (gold is a good example). No need to get fancy. 

For a better explanation of the driving forces we’d check out the video below.

Concluding with a Focus on You: In order of importance: 1) do not flash any money in public settings. Yes we’re serious. This is an actual safety hazard at this point in major cities, 2) it will likely get worse, yes we think the pandemic will continue through year end. You want to keep yourself as safe as possible by maintaining social distancing measures, 3) this is the best time to learn a skill/trade. Does not matter what it is. Make sure it is usable over the next 5-10 years and worry about the details later. Delete the news and focus on learning something (anything) that can pay the bills in a worst case scenario, 4) Flat is the new up – don’t complain unless you have job offers in hand. If you do, feel free to ramp up the pressure, politics will remain important so don’t mess it up and 5) focus your efforts on scarce assets and cash. This will give you the opportunity to buy time while simultaneously avoiding a massive pile of cash earning 0% over the long-term. 

Newer Readers: For those that are unfamiliar with our blog we have three high quality products in order: 1) Efficiency, 2) Triangle Investing and 3) Spending for Maximum Return. In order, you learn how to make a good amount of money (a million liquid within 10 years or so), how to correctly invest it and finally how we’d avoid blowing it all with intelligent spending and PED use to improve quality of life. We hold Q&As 1-2x a month for purchasers only.